yu60_NOEL CELISAFP via Getty Images_cpi china NOEL CELIS/AFP via Getty Images

China Needs Higher Inflation

Some Chinese economists have attempted to assuage inflation fears by noting that the recent surge in the producer price index is unlikely to translate into a sharp uptick in consumer prices. In fact, this is precisely what China should fear.

BEIJING – Recent price increases in the world’s two largest economies have unnerved global markets, which have become accustomed to the low inflation – and even deflation – that has prevailed for decades. But, at least in China, a little inflation would not be a bad thing.

In the United States, massive government spending during the COVID-19 crisis has raised fears of a financial reckoning, and recent price data are reinforcing these concerns. The consumer price index (CPI) surged by 4.2% year on year in April – the fastest growth since 2008. Moreover, the monthly increase accelerated to 0.8% in April, from 0.6% in March, although the rate fell back to 0.6% in May. The producer price index (PPI) has also risen, to 217.5 in April, up from 185.5 a year earlier.

These data have intensified pressure on the US Federal Reserve to tighten its ultra-loose monetary policy. And yet, in April, Fed Chair Jerome Powell stressed that the central bank is still a “long way” from withdrawing monetary support, even if that means allowing inflation to run above 2% temporarily. This should calm markets, though many economists remain convinced that the Fed is overestimating its ability to keep inflation under control in the longer term.

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